joe_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10‑Q

 


(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     .

 

Commission file number: 1‑10466

 


 

The St. Joe Company

(Exact name of registrant as specified in its charter)

 


 

 

 

Florida

59‑0432511

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

133 South Watersound Parkway

 

Watersound, Florida

32461

(Address of principal executive offices)

(Zip Code)

 

(850) 231‑6400

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES  ☑    NO  ◻

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES  ☑    NO  ◻

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

Non-accelerated filer

◻  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).   YES  ◻    NO  ☑

 

As of July 30, 2018, there were 61,295,299 shares of common stock, no par value, outstanding.

 

 

 

 

 


 

Table of Contents

THE ST. JOE COMPANY

INDEX

 

 

 

Page No.

PART I 

 

Item 1. Financial Statements 

3

Condensed Consolidated Balance Sheets - June 30, 2018 and December 31, 2017 

3

Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2018 and 2017 

5

Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2018 and 2017 

6

Condensed Consolidated Statement of Changes in Stockholders’ Equity - Six Months Ended June 30, 2018 

7

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2018 and 2017 

8

Notes to the Condensed Consolidated Financial Statements 

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

35

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

56

Item 4. Controls and Procedures 

56

PART II 

 

Item 1. Legal Proceedings 

57

Item 1A. Risk Factors 

57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

57

Item 3. Defaults Upon Senior Securities 

58

Item 4. Mine Safety Disclosures 

58

Item 5. Other Information 

58

Item 6. Exhibits 

58

SIGNATURES 

59

 

 

2


 

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1.         Financial Statements

THE ST. JOE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

ASSETS

 

 

  

 

 

  

Investment in real estate, net

 

$

339,457

 

$

332,624

Cash and cash equivalents

 

 

215,095

 

 

192,083

Investments - debt securities

 

 

14,202

 

 

76,245

Investments - equity securities

 

 

38,830

 

 

35,023

Restricted investments

 

 

3,406

 

 

4,469

Income tax receivable

 

 

1,651

 

 

8,371

Claim settlement receivable

 

 

5,360

 

 

5,280

Other assets

 

 

46,433

 

 

47,133

Property and equipment, net of accumulated depreciation of $61,631 and $60,697 at June 30, 2018 and December 31, 2017, respectively

 

 

11,670

 

 

11,776

Investments held by special purpose entities

 

 

207,664

 

 

207,989

Total assets

 

$

883,768

 

$

920,993

LIABILITIES AND EQUITY

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Debt, net

 

$

59,166

 

$

55,630

Other liabilities

 

 

49,320

 

 

47,259

Deferred tax liabilities, net

 

 

49,087

 

 

48,983

Senior Notes held by special purpose entity

 

 

176,655

 

 

176,537

Total liabilities

 

 

334,228

 

 

328,409

Equity:

 

 

  

 

 

  

Common stock, no par value; 180,000,000 shares authorized; 65,907,822 and 65,897,866 issued at June 30, 2018 and December 31, 2017, respectively; and 61,842,662 and 65,897,866 outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

424,736

 

 

424,694

Retained earnings

 

 

182,033

 

 

154,324

Accumulated other comprehensive loss

 

 

(613)

 

 

(1,461)

Treasury stock at cost, 4,065,160 shares held at June 30, 2018

 

 

(72,463)

 

 

 —

Total stockholders’ equity

 

 

533,693

 

 

577,557

Non-controlling interest

 

 

15,847

 

 

15,027

Total equity

 

 

549,540

 

 

592,584

Total liabilities and equity

 

$

883,768

 

$

920,993

 

See accompanying notes to the condensed consolidated financial statements.

3


 

Table of Contents

THE ST. JOE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

The following presents the portion of the consolidated balances attributable to the Company’s consolidated variable interest entities, which as of June 30, 2018 and December 31, 2017 include the Pier Park North joint venture (“Pier Park North JV”), Pier Park Crossings LLC (“Pier Park Crossings JV”), Windmark JV, LLC (“Windmark JV”), Panama City Timber Finance Company, LLC and Northwest Florida Timber Finance, LLC as discussed in Note 2. Summary of Significant Accounting Policies. Basis of Presentation and Principles of Consolidation. As of December 31, 2017, consolidated balances attributable to the Company’s consolidated variable interest entities also include Artisan Park, L.L.C., see Note 9. Real Estate Joint Ventures for additional information. The following assets may only be used to settle obligations of the consolidated variable interest entities and the following liabilities are only obligations of the variable interest entities and do not have recourse to the general credit of the Company, except for covenants and limited guarantees discussed in Note 10. Debt, Net.

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2018

 

2017

ASSETS

 

 

  

 

 

  

Investment in real estate

 

$

60,018

 

$

58,441

Cash and cash equivalents

 

 

3,507

 

 

5,084

Other assets

 

 

14,836

 

 

11,889

Investments held by special purpose entity

 

 

207,664

 

 

207,989

Total assets

 

$

286,025

 

$

283,403

LIABILITIES

 

 

  

 

 

  

Debt, net

 

$

50,294

 

$

46,783

Other liabilities

 

 

3,535

 

 

4,357

Senior Notes held by special purpose entity

 

 

176,655

 

 

176,537

Total liabilities

 

$

230,484

 

$

227,677

 

See accompanying notes to the condensed consolidated financial statements.

4


 

Table of Contents

THE ST. JOE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2018

 

2017

    

2018

    

2017

 

Revenue:

    

 

  

    

 

  

 

 

  

 

 

  

 

Real estate revenue

 

$

32,159

 

$

7,150

 

$

39,861

 

$

8,675

 

Resorts and leisure revenue

 

 

13,270

 

 

19,328

 

 

20,719

 

 

27,436

 

Leasing revenue

 

 

3,094

 

 

2,842

 

 

6,141

 

 

5,398

 

Timber revenue

 

 

1,911

 

 

1,327

 

 

3,577

 

 

2,651

 

Total revenue

 

 

50,434

 

 

30,647

 

 

70,298

 

 

44,160

 

Expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Cost of real estate revenue

 

 

2,954

 

 

3,614

 

 

7,122

 

 

3,945

 

Cost of resorts and leisure revenue

 

 

9,820

 

 

14,884

 

 

16,819

 

 

23,687

 

Cost of leasing revenue

 

 

842

 

 

798

 

 

1,666

 

 

1,467

 

Cost of timber revenue

 

 

193

 

 

238

 

 

406

 

 

395

 

Other operating and corporate expenses

 

 

5,010

 

 

4,154

 

 

10,955

 

 

10,334

 

Depreciation, depletion and amortization

 

 

2,271

 

 

2,032

 

 

4,527

 

 

3,985

 

Total expenses

 

 

21,090

 

 

25,720

 

 

41,495

 

 

43,813

 

Operating income

 

 

29,344

 

 

4,927

 

 

28,803

 

 

347

 

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

 

Investment income, net

 

 

5,981

 

 

14,303

 

 

9,646

 

 

24,658

 

Interest expense

 

 

(2,954)

 

 

(3,035)

 

 

(5,979)

 

 

(6,078)

 

Other income, net

 

 

243

 

 

328

 

 

520

 

 

4,063

 

Total other income, net

 

 

3,270

 

 

11,596

 

 

4,187

 

 

22,643

 

Income before income taxes

 

 

32,614

 

 

16,523

 

 

32,990

 

 

22,990

 

Income tax expense

 

 

(6,547)

 

 

(5,909)

 

 

(6,298)

 

 

(8,188)

 

Net income

 

 

26,067

 

 

10,614

 

 

26,692

 

 

14,802

 

Net loss attributable to non-controlling interest

 

 

128

 

 

150

 

 

260

 

 

330

 

Net income attributable to the Company

 

$

26,195

 

$

10,764

 

$

26,952

 

$

15,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic and Diluted

 

 

  

 

 

  

 

 

  

 

 

  

 

Weighted average shares outstanding

 

 

63,760,022

 

 

71,981,505

 

 

64,613,298

 

 

72,970,462

 

Net income per share attributable to the Company

 

$

0.41

 

$

0.15

 

$

0.42

 

$

0.21

 

 

 

See accompanying notes to the condensed consolidated financial statements.

5


 

Table of Contents

THE ST. JOE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income:

 

$

26,067

 

$

10,614

 

$

26,692

 

$

14,802

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

  

 

 

 

 

 

  

 

Available-for-sale investment items:

 

 

 

 

 

  

 

 

 

 

 

  

 

Net unrealized gain (loss) on available-for-sale investments

 

 

321

 

 

745

 

 

(482)

 

 

4,650

 

Net unrealized loss on restricted investments

 

 

 —

 

 

(4)

 

 

(9)

 

 

 —

 

Reclassification of net realized (gain) loss included in earnings

 

 

(28)

 

 

(7,739)

 

 

1,050

 

 

(10,861)

 

Reclassification into retained earnings (1)

 

 

 —

 

 

 —

 

 

932

 

 

 —

 

Reclassification of other-than-temporary impairment loss included in earnings

 

 

 —

 

 

 —

 

 

63

 

 

366

 

Total before income taxes

 

 

293

 

 

(6,998)

 

 

1,554

 

 

(5,845)

 

Income tax (expense) benefit (2)

 

 

(74)

 

 

2,835

 

 

(706)

 

 

2,394

 

Total other comprehensive income (loss), net of tax

 

 

219

 

 

(4,163)

 

 

848

 

 

(3,451)

 

Total comprehensive income, net of tax

 

$

26,286

 

$

6,451

 

$

27,540

 

$

11,351

 


(1)

The reclassification into retained earnings relates to the adoption of Accounting Standards Update (“ASU”) 2016‑01 Financial Instruments - Overall, as amended (“ASU 2016‑01”). The new guidance was effective January 1, 2018, and requires equity investments to be measured at fair value with changes in fair value recognized in results of operations rather than the condensed consolidated statements of comprehensive income. See Note 2. Summary of Significant Accounting Policies.

(2)

Income tax expense for the six months ended June 30, 2018 includes $0.3 million of income tax expense related to the adoption of ASU 2018‑02 Income Statement - Reporting Comprehensive Income (“ASU 2018‑02”). The new guidance was effective January 1, 2018, and allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”). See Note 2. Summary of Significant Accounting Policies.

 

See accompanying notes to the condensed consolidated financial statements.

 

 

6


 

Table of Contents

 

THE ST. JOE COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

    

 

    

 

Accumulated

    

    

 

    

    

 

    

    

 

 

 

Common Stock

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

Comprehensive

 

 

Treasury

 

 

Non-controlling

 

 

 

 

    

Shares

    

 

Amount

    

 

Retained Earnings

    

 

(Loss) Income

    

 

Stock

    

 

Interest

    

 

Total

Balance at December 31, 2017

 

65,897,866

 

$

424,694

 

$

154,324

 

$

(1,461)

 

$

 —

 

$

15,027

 

$

592,584

Capital contribution from non-controlling interest

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

887

 

 

887

Allocation of ownership interest in Pier Park Crossings JV

 

 —

 

 

(490)

 

 

 —

 

 

 —

 

 

 —

 

 

490

 

 

 —

Additional ownership interest acquired in Artisan Park, LLC

 

 —

 

 

297

 

 

 —

 

 

 —

 

 

 —

 

 

(297)

 

 

 —

Issuance of common stock for director’s fees

 

 —

 

 

43

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

43

Issuance of common stock for officer compensation

 

9,956

 

 

192

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

192

Repurchase of common shares

 

(4,065,160)

 

 

 —

 

 

 —

 

 

 —

 

 

(72,463)

 

 

 —

 

 

(72,463)

Adoption of ASU 2014-09 Revenue From Contracts with Customers, as amended

 

 —

 

 

 —

 

 

1,140

 

 

 —

 

 

 —

 

 

 —

 

 

1,140

Adoption of ASU 2016-01 Financial Instruments - Overall, as amended

 

 —

 

 

 —

 

 

(696)

 

 

696

 

 

 —

 

 

 —

 

 

 —

Adoption of ASU 2018-02 Income Statement - Reporting Comprehensive Income

 

 —

 

 

 —

 

 

313

 

 

(313)

 

 

 —

 

 

 —

 

 

 —

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

465

 

 

 —

 

 

 —

 

 

465

Net income

 

 —

 

 

 —

 

 

26,952

 

 

 —

 

 

 —

 

 

(260)

 

 

26,692

Balance at June 30, 2018

 

61,842,662

 

$

424,736

 

$

182,033

 

$

(613)

 

$

(72,463)

 

$

15,847

 

$

549,540

 

See accompanying notes to the condensed consolidated financial statements.

 

 

7


 

Table of Contents

THE ST. JOE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

    

 

  

    

 

  

 

Net income

 

$

26,692

 

$

14,802

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

  

 

Depreciation, depletion and amortization

 

 

4,527

 

 

3,985

 

Stock based compensation

 

 

235

 

 

19

 

Loss (gain) on sale of investments

 

 

1,086

 

 

(10,861)

 

Unrealized gain on investments, net

 

 

(729)

 

 

 —

 

Other-than-temporary impairment loss

 

 

63

 

 

366

 

Deferred income tax (benefit) expense

 

 

(54)

 

 

3,488

 

Impairment loss on investment in real estate

 

 

99

 

 

 —

 

Cost of real estate sold

 

 

6,545

 

 

3,426

 

Expenditures for and acquisition of real estate to be sold

 

 

(8,288)

 

 

(5,021)

 

Accretion income and other

 

 

(1,038)

 

 

(1,899)

 

Loss on disposal of property and equipment

 

 

 8

 

 

29

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Notes receivable

 

 

(381)

 

 

(808)

 

Other assets

 

 

(157)

 

 

(2,657)

 

Other liabilities

 

 

2,184

 

 

14,093

 

Income taxes receivable

 

 

6,720

 

 

26,671

 

Net cash provided by operating activities

 

 

37,512

 

 

45,633

 

Cash flows from investing activities:

 

 

  

 

 

  

 

Expenditures for operating property

 

 

(9,659)

 

 

(15,646)

 

Expenditures for property and equipment

 

 

(1,252)

 

 

(1,271)

 

Proceeds from the disposition of assets

 

 

5,000

 

 

 —

 

Purchases of investments - debt securities

 

 

(38)

 

 

(74,740)

 

Purchases of investments - equity securities

 

 

(10,442)

 

 

(19,081)

 

Sales of investments - debt securities

 

 

64,630

 

 

102,065

 

Sales of investments - equity securities

 

 

7,328

 

 

8,324

 

Maturities of assets held by special purpose entities

 

 

414

 

 

415

 

Net cash provided by investing activities

 

 

55,981

 

 

66

 

Cash flows from financing activities:

 

 

  

 

 

  

 

Capital contribution from non-controlling interest

 

 

887

 

 

141

 

Repurchase of common shares

 

 

(72,463)

 

 

(40,444)

 

Borrowings on debt

 

 

5,737

 

 

1,188

 

Principal payments for debt

 

 

(871)

 

 

(838)

 

Debt issuance costs

 

 

(1,158)

 

 

(20)

 

Net cash used in financing activities

 

 

(67,868)

 

 

(39,973)

 

Net increase in cash, cash equivalents and restricted cash

 

 

25,625

 

 

5,726

 

Cash, cash equivalents and restricted cash at beginning of the period

 

 

192,365

 

 

243,087

 

Cash, cash equivalents and restricted cash at end of the period

 

$

217,990

 

$

248,813

 

 

See accompanying notes to the condensed consolidated financial statements.

8


 

Table of Contents

THE ST. JOE COMPANY

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

(Dollars in thousands)

(Unaudited)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows.

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

Cash and cash equivalents

 

$

215,095

 

$

247,178

 

Restricted cash included in other assets

 

 

2,895

 

 

1,635

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

217,990

 

$

248,813

 

 

Restricted cash includes amounts set aside as letters of credit collateral and as a requirement of financing for certain of the Company’s developments.

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

 

 

2018

 

2017

 

Cash paid during the period for:

    

 

  

    

 

  

 

Interest

 

$

5,822

 

$

5,819

 

Income taxes

 

$

2,005

 

$

2,312

 

 

 

 

 

 

 

 

 

Non-cash financing and investment activities:

 

 

  

 

 

  

 

(Decrease) increase in Community Development District debt

 

$

(207)

 

$

73

 

Expenditures for operating properties and property and equipment financed through accounts payable

 

$

563

 

$

6,098

 

 

See notes to the condensed consolidated financial statements.

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THE ST. JOE COMPANY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, unless otherwise stated)

(Unaudited)

1. Nature of Operations

The St. Joe Company together with its consolidated subsidiaries (“St. Joe” or the “Company”) is a Florida real estate development, asset management and operating company with real estate assets and operations currently concentrated primarily in Northwest Florida. Approximately 90% of the Company’s real estate assets are located within fifteen miles of the Gulf of Mexico.

The Company conducts primarily all of its business in the following four reportable operating segments: 1) residential real estate, 2) resorts and leisure, 3) commercial leasing and sales and 4) forestry.

In prior periods, the Company’s reportable operating segments were 1) residential real estate, 2) commercial real estate, 3) resorts and leisure, 4) leasing operations and 5) forestry. Commencing in the fourth quarter of 2017, the Company’s commercial real estate segment and leasing operations segment were combined into a new segment titled “commercial leasing and sales”. This change is consistent with the Company’s belief that the decision making and management of the assets in these segments are being made as one group. Prior to the fourth quarter of 2017, commercial real estate and leasing operations were treated as individual operating segments. All prior year segment information has been reclassified to conform to the 2018 presentation. The change in reporting segments had no effect on the condensed consolidated balance sheets, statements of income, statements of comprehensive income or statements of cash flows for the periods presented. See Note 17. Segment Information.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10‑Q. Accordingly, certain information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements are not included herein. The unaudited interim condensed consolidated financial statements include the accounts of the Company and all of its majority-owned and controlled subsidiaries and variable interest entities where the Company is the primary beneficiary. Investments in joint ventures and limited partnerships in which the Company is not the primary beneficiary are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated in consolidation. The December 31, 2017 condensed consolidated balance sheet amounts have been derived from the Company’s December 31, 2017 audited consolidated financial statements. Certain prior period amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on the Company’s previously reported total assets and liabilities, stockholders’ equity or net income. Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018.

A variable interest entity (“VIE”) is an entity in which a controlling financial interest may be achieved through arrangements that do not involve voting interests. A VIE is required to be consolidated by its primary beneficiary, which is the entity that possesses the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to the entity. The Company consolidates VIEs when it is the primary beneficiary of the VIE, including real estate joint ventures determined to be VIEs. See Note 9. Real Estate Joint Ventures.

The interim condensed consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for fair presentation of the information contained herein. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes

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included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2017. The Company adheres to the same accounting policies in preparation of its unaudited interim condensed consolidated financial statements as the Company’s December 31, 2017 annual financial statements, except for recently adopted accounting pronouncements detailed below. As required under GAAP, interim accounting for certain expenses, including income taxes, are based on full year assumptions. For interim financial reporting purposes, income taxes are recorded based upon estimated annual income tax rates.

Concentration of Risks and Uncertainties

The Company’s real estate investments are concentrated in Northwest Florida in a number of specific development projects. Uncertain economic or other conditions could have an adverse impact on the Company’s real estate values and could cause the Company to sell assets at depressed values in order to pay ongoing obligations.

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments, other receivables, investments held by special purpose entity or entities (“SPE”), and investments in retained interests. The Company deposits and invests cash with regional financial institutions, and as of June 30, 2018, these balances exceeded the amount of F.D.I.C. insurance provided on such deposits. In addition, as of June 30, 2018 the company had $9.9 million invested in U.S. Treasury securities, $4.3 million invested in two issuers of corporate debt securities that are non-investment grade, $38.8 million invested in five issuers of preferred stock that are non-investment grade and two issuers of preferred stock that are investment grade, as well as investments of $165.6 million in short term commercial paper from twelve issuers.

Earnings Per Share

Basic and diluted earnings per share are calculated by dividing net income by the average number of common shares outstanding for the period. For the three and six months ended June 30, 2018 and 2017, basic and diluted average shares outstanding were the same and there were no outstanding common stock equivalents as of June 30, 2018 or December 31, 2017. Non-vested restricted stock is included in outstanding shares at the time of grant.

Revenue and Revenue Recognition

Revenue consists primarily of real estate sales and related fees, resorts and leisure operations, leasing operations, and timber sales. Taxes collected from customers and remitted to governmental authorities (e.g. sales tax) are excluded from revenue, costs and expenses.

Effective January 1, 2018, with the adoption of ASU 2014-09 Revenue from Contracts with Customers, as amended (“Topic 606”), estimated lot residuals (a percentage of the sales price of a completed home received when the home price or gross profit of the home exceeds a negotiated threshold) and certain estimated fees are recognized as revenue at the time of sale to homebuilders, subject to constraints, and any change in circumstances from the estimated amounts will be updated at each reporting period. For the three and six months ended June 30, 2018, real estate revenue includes approximately $0.2 million and $0.6 million, respectively of estimated lot residuals and approximately $0.3 million and $0.6 million, respectively, of certain estimated fees related to homebuilder homesite sales. Prior to 2018, these lot residuals and fees were recognized in revenue when consideration was received by the Company in periods subsequent to the initial recognition of revenue for the sale of the homesite.

Recently Adopted Accounting Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 that established the principles used to recognize revenue for all entities. In March 2016, the FASB issued ASU 2016‑08 that further clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016‑10 that clarified guidance on identifying performance obligations and to improve the operability and understandability of licensing implementation guidance. In May 2016, the FASB issued ASU 2016‑11 that rescinded SEC guidance pursuant

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to announcements at the March 3, 2016 Emerging Issues Task Force Meeting. In May 2016, the FASB issued ASU 2016‑12 that provided narrow-scope improvements and practical expedients to Revenue from Contracts with Customers. In December 2016, the FASB issued ASU 2016‑20 that included technical corrections and improvements to Topic 606. The Company adopted the new guidance as of January 1, 2018 and elected to implement Topic 606 using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained earnings. The impact of adopting this guidance resulted in an adjustment to increase retained earnings by $1.5 million, offset by a decrease of $0.4 million related to tax effects, for a net effect of $1.1 million, an increase to accounts receivable, net by $2.1 million and a decrease to investment in real estate, net by $0.6 million as of January 1, 2018, related to the recognition of estimated lot residuals and certain fees for homesites sold to homebuilders, where the homes had not yet been sold to customers as of December 31, 2017.

Financial Instruments

In January 2016, the FASB issued ASU 2016‑01 that amended existing guidance to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in results of operations. Additionally, certain disclosure requirements and other aspects of accounting for financial instruments changed as a result of the new guidance. In February 2018, the FASB issued ASU 2018‑03 that included technical corrections and improvements to ASU 2016‑01. The Company adopted ASU 2016‑01 and ASU 2018‑03 simultaneously, effective January 1, 2018, and implemented it using a cumulative-effect adjustment between accumulated other comprehensive loss and retained earnings of $0.9 million, offset by an adjustment of $0.2 million related to tax effects, for a net effect of $0.7 million as of the date of adoption. As a result of the adoption of this guidance the change in the fair value of the Company’s equity investments is recognized in the condensed consolidated statements of income rather than the condensed consolidated statements of comprehensive income.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016‑15, which amended the classification of certain cash receipts and cash payments, to reduce the diversity in how these cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted the new guidance as of January 1, 2018. As this guidance only affects the classification within the statement of cash flows, it did not have any impact on the Company’s cash flows.

Statement of Cash Flows - Restricted Cash

In November 2016, the FASB issued ASU 2016‑18, which required that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new guidance as of January 1, 2018, using a retrospective transition method to each period presented. The adoption of this guidance did not have a material impact on the Company’s cash flows.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018‑02, which allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The ASU also required additional disclosures that include a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income, whether the Company elected to reclassify the effects from the Tax Act and information about other tax effects related to the Tax Act that are reclassified from accumulated other comprehensive income to retained earnings, if any. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and should be applied either in the period of adoption or retrospectively to each period in which the effect of the Tax Act is recognized. Early adoption is permitted, including adoption in an interim period. The Company elected to early adopt the new guidance as of January 1, 2018, and implemented it using a

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cumulative-effect adjustment to retained earnings from accumulated other comprehensive loss of $0.3 million related to unrealized gains and losses on available-for-sale securities as of the date of adoption. The new guidance also required the Company to disclose its policy on accounting for income tax effects in accumulated other comprehensive income (loss). In general, the Company applies the aggregate portfolio method with respect to available-for-sale debt securities.

Recently Issued Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU 2016‑02 that amends the existing accounting standards for lease accounting, including requiring lessees to recognize both finance and operating leases with terms of more than 12 months on the balance sheet. The accounting applied by a lessor is largely unchanged from existing guidance. This amendment also requires certain quantitative and qualitative disclosures about leasing arrangements. In January 2018, the FASB issued ASU 2018‑01 which provides an optional transition practical expedient to not evaluate under the new lease standard, existing or expired land easements that were not previously accounted for as leases. In July 2018, the FASB issued ASU 2018-10 that provides clarifications and improvements to ASU 2016-02. The new guidance will be effective for annual and interim periods beginning after December 15, 2018 and requires a modified retrospective adoption. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and cash flows.

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016‑13 that requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected and requires that credit losses from available-for-sale debt securities be presented as an allowance for credit loss. This new guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and cash flows.

 

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3. Investment in Real Estate

Real estate by property type and segment includes the following:

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2018

 

2017

Development property:

 

 

  

 

 

  

Residential real estate

 

$

99,034

 

$

100,279

Resorts and leisure

 

 

7,438

 

 

4,131

Commercial leasing and sales

 

 

61,822

 

 

53,896

Forestry

 

 

2,143

 

 

2,488

Corporate

 

 

2,427

 

 

2,571

Total development property

 

 

172,864

 

 

163,365

 

 

 

 

 

 

 

Operating property:

 

 

  

 

 

  

Residential real estate

 

 

7,344

 

 

7,344

Resorts and leisure

 

 

103,670

 

 

103,616

Commercial leasing and sales

 

 

110,513

 

 

110,491

Forestry

 

 

19,755

 

 

19,510

Other

 

 

50

 

 

50

Total operating property

 

 

241,332

 

 

241,011

Less: Accumulated depreciation

 

 

74,739

 

 

71,752

Total operating property, net

 

 

166,593

 

 

169,259

Investment in real estate, net

 

$

339,457

 

$

332,624

 

Development property consists of land the Company is developing or intends to develop for sale or future operations and includes direct costs associated with the land, development and construction costs and indirect costs. Residential real estate includes residential communities. Resorts and leisure development property consists of the improvement and expansion of the existing beach club property, land and development costs and improvements to an existing restaurant and other property. Commercial leasing and sales development property primarily consists of land and development costs for commercial and industrial uses, including the Pier Park Crossings JV, land holdings near the Northwest Florida Beaches International Airport and Port of Port St. Joe. Development property in the resorts and leisure and commercial leasing and sales segments will be reclassified as operating property as it is placed into service.

Operating property includes property that the Company uses for operations and activities. Residential real estate operating property consists primarily of residential utility assets. The resorts and leisure operating property includes the WaterColor Inn, WaterSound Inn, certain vacation rental properties, golf courses, a beach club and marinas. Commercial leasing and sales operating property includes property developed or purchased by the Company and used for retail and commercial rental purposes, including property in the Pier Park North JV, VentureCrossings and Beckrich Office Park, as well as other properties. Forestry operating property includes the Company’s timberlands. Operating property may be sold in the future as part of the Company’s principal real estate business.

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4. Investments

Available-For-Sale Investments

At June 30, 2018, investments - debt securities and restricted investments classified as available-for-sale securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross Unrealized

    

Gross Unrealized

    

 

 

 

 

Amortized Cost

 

Gains

 

Losses

 

Fair Value

Investments - debt securities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury securities

 

$

9,961

 

$

 —

 

$

15

 

$

9,946

Corporate debt securities

 

 

5,042

 

 

28

 

 

814

 

 

4,256

 

 

 

15,003

 

 

28

 

 

829

 

 

14,202

Restricted investments:

 

 

  

 

 

  

 

 

  

 

 

  

Short-term bond

 

 

3,252

 

 

 —

 

 

13

 

 

3,239

Money market fund

 

 

167

 

 

 —

 

 

 —

 

 

167

 

 

 

3,419

 

 

 —

 

 

13

 

 

3,406

 

 

$

18,422

 

$

28

 

$

842

 

$

17,608

 

At December 31, 2017, investments - debt securities, investments - equity securities and restricted investments classified as available-for-sale securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross Unrealized

    

Gross Unrealized

    

 

 

 

 

Amortized Cost

 

Gains

 

Losses

 

Fair Value

Investments - debt securities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury securities

 

$

9,892

 

$

 —

 

$

22

 

$

9,870

Corporate debt securities

 

 

67,781

 

 

411

 

 

1,817

 

 

66,375

 

 

 

77,673

 

 

411

 

 

1,839

 

 

76,245

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments - equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

35,955

 

 

423

 

 

1,355

 

 

35,023

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted investments: